The merger of two universities, planned for next year, has been postponed.
Uwic was considering merging with University of Wales Newport
The University of Wales, Newport (UWN) and the University of Wales Institute in Cardiff (Uwic) had applied to merge.
But the Higher Education Funding Council for Wales (HEFCW) wanted the University of Glamorgan included in merger talks as a condition of funding.
Education Minister Jane Davidson was "disappointed" and urged the three universities "to move this project forward".
The HEFCW had recommended in a report out in May that the three universities should merge to create the biggest university in Wales from September 2006, with more than 30,000 students.
The condition to include the University of Glamorgan was attached to the HEFCW's agreement of funding.
Professor Phil Gummett from HEFCW said that the condition did not mean that the three institutions had to merge, but that they all had to work closer together in order to stop public funding being used to create "more expensive" competition of higher education providers in south Wales.
UWN and Uwic said that the decision to postpone the merger was made "reluctantly" and they would continue to collaborate.
Professor James Lusty, Vice-Chancellor of the University of Wales, Newport, said: "If merger discussions were to continue for a lengthy period of time there would be a significant danger of staff diverting attention away from other strategic goals".
He said the condition to include Glamorgan would "delay access to merger funding in the short term".
Margaret Phelan from the union NATFHE reacted angrily, warning that a "spiral of decline" would occur unless the three institutions worked more closely together.
A ballot by lecturers at Uwic earlier this week saw a 93% vote of no confidence in the leadership of vice-chancellor Tony Chapman over the way merger plans with UWN were going.
Newport 10,000 students
She said that an urgent meeting among union members would now be organised.
Unless significant progress was made, a ballot for industrial action would be held in September, said Ms Phelan.
Previous merger discussions between the University of Glamorgan and Uwic were called off two years ago.
Education Minister Jane Davidson said the HEFCW's independent report "set out a compelling vision" for higher education in south east Wales involving the three universities.
"As was recently stated by the first minister, it is essential, therefore, for the sake of the institutions themselves, their staff, students, the people and economy of south Wales, that the three institutions in south east Wales plan their futures together," said Ms Davidson.
"I urge the governing bodies, vice-chancellors and staff of the three universities to work with the HEFCW to move this project forward," she added.